Rather than the more familiar Butterfly traded in the FX market, in the commodity market a butterfly generally consists of 3 call (or 3 put) options, the first and last of which you buy (or sell) and the middle of which you sell (or buy), where the volume in units of the middle leg is double the volume of each of the other two legs.
Generally this structure has equidistant strikes, i.e., the strike of the middle leg is midway between the strikes of leg 1 and leg 3.
In order to create an equidistant structure (which is the market convention for this structure), in SDX Commodities & Energy the three Strike fields are linked to ensure that the strike of the middle leg is midway between the strikes of leg 1 and leg 3. However, you can then manually edit any of the strikes to create an unbalanced butterfly. You may want to do this in order to create a zero-cost strategy.
To create a long strategy you would buy the first and third legs and sell the middle leg; to create a short strategy you would sell the first and third legs and buy the middle.
What is a commodity butterfly used for?
This three legged butterfly is mainly used by investors looking to lock in a profit if the commodity trades within a given range. It is also a popular tool used by program traders to seek out arbitrage opportunity.
Pricing a three-vol butterfly in SDX Commodities & Energy
In the Single Option page, you can automatically enter into a three-vol butterfly (3vbfl) that fits the commodity market conventions. To do this, in the Option Class field from the dropdown list select Vanilla Strategy and then Three-vol Butterfly (3vbfl).
Alternatively, in the same page you can create it manually using the Three-Leg Vanilla.